FTX: the three letters on everyone’s lips in recent days. For those active in the cryptocurrency space, it has been a devastating blow as a tumultuous year for cryptocurrency draws to a close.
The repercussions are severe, as more than a million people and businesses owed money following the collapse of the cryptocurrency exchange, according to bankruptcy filings. With ongoing investigations into the crash, it will no doubt push for regulatory changes, either through lawmakers or through federal agencies.
While regulators may be relieved that the scandal did not occur on their watch, it highlights that regulators around the world simply have not yet taken enough action regarding crypto exchanges, many of whom would welcome clear frameworks from of those in power.
Related: Bankman-Fried misled regulators away from centralized finance
Some have argued that regulators are to blame for allowing or even encouraging FTX behavior and, by extension, the creation of many flawed cryptocurrencies. It is fair to say that regulators are partly to blame for this tragedy and while failure to act shields them from liability, inaction on their part is just as damaging to their reputation as they are portrayed as irresponsible for not doing more to protect consumers.
Ripple CEO Brad Garlinghouse tweeted on Nov. 10: “Singapore has a licensing framework, an established token taxonomy, and much more. They can properly regulate cryptocurrency because they have done the work to define what is “good” and they know that all tokens are not securities… to protect consumers, we need regulatory guidance for businesses that ensures trust and transparency.” .
@SenWarrenBrian is right: to protect consumers, we need regulatory guidance for businesses that ensures trust and transparency. There’s a reason most cryptocurrency trading takes place offshore: companies have no guidance on how to comply here in the US 1/2
—Brad Garlinghouse (@bgarlinghouse) November 10, 2022
Cryptocurrencies are a unique asset class that continues to gain ground. The longer the sector goes without defined regulations, the greater the potential for negative events and crises. Given the novelty and international nature of crypto assets, it is not surprising that regulators are facing an unprecedented challenge that is difficult to overcome.
However, the lack of action by regulators is a major contributing factor to Sam Bankman-Fried’s ability to manipulate and misuse assets for his own gain; Without direct supervision, any financial service (including banks) could be tempted to use their customers to increase their profits at the risk of putting them in danger of losing all their money.
Related: Will SBF face consequences for FTX’s mismanagement? don’t count on it
Comparing the behaviors of regulated and unregulated entities, a good example is German crypto bank Nuri, which told its 500,000 users to withdraw funds from their accounts before the company closed and liquidated its business. This is unlike unregulated companies like FTX and other cryptocurrency exchanges, who have simply frozen their clients’ assets, leaving them unable to recover their funds.
While it would be pertinent and sensible for any business that owns third-party assets (such as centralized exchanges and lending platforms) to fall under the same level of scrutiny and guidelines as banks, it could be even more beneficial if traditional banks take on paper from a “trusted third party” and offer cryptographic services to their customers directly. Acting as a trusted intermediary, their history over the centuries gives them a level of trust and security that could help consumers onboard and use crypto services much more easily.
As the world of cryptocurrencies continues to await much-needed intervention from regulators, banks need to take the lead and embrace the new digital asset as a way to start mitigating the risks and losses affecting millions of crypto users today.
yang lan, CFA, is co-founder and chairman of Fiat24, the first Swiss bank built on blockchain. He has a master’s degree in economics from the University of Munich and an MBA from IE Business School. A former banker at UBS, he has decades of banking experience.
Opinions expressed are solely those of the author and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.
